Staying Real in Real Estate

Why owning a rental property is one of the best retirement moves.

by Suren Goyal

Despite the presence of a multitude of investment instruments — and they’re growing by the day — the real estate sector has not lost its sheen and remains one of the hot favorites of investors. The importance of having property increases manifold in cases in which one is nearing retirement. Having a sustainable rental income after retirement acts as a solid source of income for the elderly. Here is how having a rental property will help after retirement.

A Solid Asset

Irrespective of the type of property, having real estate in one’s investment portfolio is a mark of intelligent investing. If it is a land tract, its value will appreciate with time, and by the time you retire, you will have a high-valued asset. Even after many years of rental income generation, it can be sold at a highly appreciated price. The selling prices will depend upon many factors, such as the location, development of the area, type of land, and connectivity, etc. Even if it is not generating rental income, it can be a solid asset during a rainy day.

Sustained Income

Sustained rental income is easily comparable with a pension. If the tenants are good and the rent/lease arrangements are watertight, the property will generate sustained rental income for the owner. Whether it is a plot, commercial property, or a shop on rent, the sustained income flow is of high importance, post-retirement.

However, the investor must carefully draft the rent agreement or lease agreement so fraudulent or unscrupulous tenants or encroachers do not pose challenges during the tenancy. Getting a certified police verification and background check will go a long way in this regard.

Investing in a Real Estate Fund

Although a relatively newer concept, Real Estate Investment Trusts (REITs) and similar real estate funds offer an attractive opportunity for property investors. Instead of investing directly in large properties, REITs are traded on the share market and returns are distributed to the investors. If you make such an investment in your prime earning days, they will turn into a valuable asset by the time you retire.

Inflation-Adjusted Returns

In addition to being a sustained income source, the returns or rental income from the property will be inflation-adjusted. As the rental agreement would make it clear that an annual increase of 10% will be applied, the returns will comfortably beat the inflation.

Even if you are paying equated monthly installment (EMIs) for the property, the rental income will cover the EMIs, and the balance would compound if invested further.

Increase in Net Worth and Declining Debt

As the rental income will cover the home loan or mortgage, the debt will come down periodically. This will increase your net worth. Once the debt is entirely paid by the rental income, you will get a free and clear rental asset, which would be a workhorse post-retirement. On the one side, you will have an income source until you die, and you will also leave a solid asset for your offspring as an inheritance.

Predictable Returns

Unlike other investment instruments, such as mutual funds and equity, where the returns are unpredictable and market controlled, the return in real estate is very predictable. Going by the historical returns pattern, you can easily guess or calculate the estimated value of the property after 20 years. You know the value of a purchase. To calculate future returns, you can use various free tools available online.

Conclusively

If real estate investment is done after proper research and locations are appropriate, the property investment might turn into a sustained source of rental income for retirees.